Opinion: Bitcoin has no place in your — or any — portfolio

Bitcoin, the digital currency that took the world by storm about a year ago, is back in the news in a big way lately.

First, there is a San Francisco startup called Coinbase backed with over $100 million that has opened the first “real” marketplace for bitcoin. Coinbase has backers including the New York Stock Exchange and Andreessen Horowitz, and aims to provide real-time pricing and a true market for bitcoin.

At the same time, Internet entrepreneurs Tyler and Cameron Winklevoss are making the rounds talking up the potential of bitcoin, claiming the potential market could be in the “trillions.” Of course, they are talking their own book as they wait for regulators to sign off on the first exchange-traded fund that will hold bitcoins … but considering there is just $3.5 billion or so held in bitcoins at present value, that’s a big-time prediction.

Bitcoin shouldn’t even be on your radar.

So what’s the score? Should investors see the decline in bitcoin prices over the last year and the recent buzz about the digital currency as a sign of hope?

No way.

The sad reality is that while there may be a select few that are going to make money on bitcoins, the vast majority of investors should not give bitcoin the time of day.

Here’s why the cryptocurrency is little more than a technological quirk, and has no place in your portfolio:

No True Value: Proponents like to talk about how bitcoin has no central bank or authority behind it as a net positive, but that fact also means a lack of true value. A bitcoin, then, is simply worth whatever a random person is willing to pay — derisively known as the “greater fool” theory, because profits rely on your ability to find someone more foolish than yourself who is willing to buy higher.

Anonymity Is a Double-Edged SwordB Another purported benefit that the currency is “frictionless” — meaning that there aren’t added costs associated with moving transactions through a megabank or credit card processor — and anonymous. This is great when you’re trying to keep a deal under the radar from the police or the tax man … but if your account is hacked and your bitcoins are stolen, you have little recourse to catch the thieves. That’s what apparently happened to Mt. Gox in 2014 when hackers made off with bitcoins worth about $460 million at the time.

Big Volatility: These characteristics, naturally, lead to big risks in bitcoin — and subsequently, big volatility in the price of the digital currency. While bitcoin surged from about $13 in January 2013 to a peak of roughly $1,150 at the end of November 2013, prices were as low as $178 a few weeks ago. Such a wild range in roughly two years should show how speculative bitcoin is.

In short, your bitcoins can go to zero either because they have no underlying value or because some hacker has stolen them and left you with no recourse. And even if they don’t go to zero, drops like the nearly 85% decline in the past few years can leave investors with a boatload of pain in a hurry.

As an investment, bitcoin has no place in your portfolio.

But. ... will bitcoin survive?

A simple but powerful rule investors should follow is to invest in something only if they understand it and can make a logical explanation of why that investment will increase in value. Unfortunately, this strange digital currency doesn’t pass that standard for the vast majority of investors.

But does that mean bitcoin is doomed? Perhaps not.

It’s worth noting that some of the biggest proponents of bitcoin are not pushing the digital currency as some kind of speculative investment. Rather, they see the value in terms of innovation and improvement in how transactions are made.

Take venture capitalist Ben Horowitz, whose firm continues to back bitcoin ventures in large part for the potential for “frictionless” transactions with low (or no) fees as the way of the future. This clearly isn’t just a hope for short-term profit based on fluctuations in the currency’s value.

Similarly, Financial Times columnist John Gapper has pointed to the innovative nature of bitcoin to allow for easy and instant exchange of ownership of high-tech products — not just for bitcoins, but potentially other digital goods and services. In Gapper’s words, bitcoin “fixes a fundamental gap in the Internet” by allowing for secure transactions even when the “goods” you’re trading are based on lines of code and not tangible.

This is indeed intriguing, and worth watching. Despite the volatility and speculative nature of bitcoin as an investment, I can’t help but be fascinated by the potential applications in the years ahead.

Still, even this is far from a guarantee that bitcoin will be any part of the future global economy.

If you’re looking for an investment in the future, it’s much less risky to consider mobile payments stocks like PayPal stock, which will come to market after eBay
EBAY, -1.44%
carves out this digital payments arm in the near future. Or heck, go with a company like Apple
AAPL, -1.92%
that already has a powerful brand and scale, and could see big success with its Apple Pay system.

But remember that even these stocks are full of uncertainty, and at risk of disruption themselves.

In short: It will be interesting to see what happens with bitcoin, and how digital transactions evolve in the years ahead.

But as for where to invest your money? Well, bitcoin shouldn’t even be on your radar.

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